Detection of Loss-Aversion in Auctions against Pre-programmed Computers

Abstract

We run experiments of first-price auctions with two groups, by which we directly detect the presence of bidders' loss aversion. Each human bidder bids against three pre-programmed computer bidders -- computers independently draw their values from the uniform distribution and bid their values in one group and 75 percent of their values in the other group. We show that loss aversion differentiates human bidders' bids between the two groups, unlike a list of behavioral influences on bidding, including risk aversion. We then find statistical evidence of loss aversion in our data. In addition, we identify and estimate the joint distribution of bidder-specific loss and risk aversion coefficients. We find that loss and risk aversion coexist, and 38 to 47 percent of overbidding is attributable to loss aversion.

Keywords: First-price auction, Risk-aversion, Loss-aversion, Reference-dependence, Laboratory experiments

JEL Classification: C11, C57, C72, C91, D44